Thursday, December 13, 2012

What is the purpose of production? According to Adam Smith and a number of other people, the purpose of production is consumption. If something is not going to be used (consumed), why bother to produce it?

Oddly, under the principles of Keynesian economics, the purpose of production (at least by capital) is not consumption! No, as far as Keynes was concerned, people who use what is produced by capital for consumption throw a monkey wrench in the works. He actually called for the "euthanasia" (mercy killing) of the rentier, a "rentier" being a small investor who lives off the income from investments.

Of course, Keynes did not advocate actual murder. Like the Mafia Don who doesn't dirty his hands with the blood of the victims he orders whacked, Keynes figured that the operation of the system would gradually eliminate the small owner from the economy . . . with a few assists from the State in the form of guaranteed wages and benefits, supplemented with welfare. Who, after all, would want to assume the risks of owning anything when he or she can obtain an absolute guarantee from the State that everyone will always be taken care of, forever?

Why eliminate small owners who use their ownership income for consumption instead of reinvestment? Because in Keynesian thought, the only way to finance new capital formation is first to cut consumption and accumulate money savings. The accumulators — the capitalists (necessarily guided by the State to ensure that they use their wealth properly to accumulate more wealth instead of spending it) — take their savings and invest in new capital formation that presumably creates jobs for non-owners so that non-owners can produce with their labor, which in the Keynesian universe is the only thing that really produces.

Okay, a few obvious flaws here. One, it is counterproductive to finance new capital formation by cutting consumption. It reduces demand, and thus the incentive for forming new capital. It is far better, as Dr. Harold G. Moulton pointed out in The Formation of Capital (1935) to finance new capital formation by turning the present value of the new capital into money and repaying the loan with the profits of the capital itself.

Two, if labor is the only truly productive thing and capital at best only enhances labor, why do we need capital at all? Wouldn't an economy that relies on labor alone be more rational — and more efficient in ensuring that labor receives its just due? Shouldn't we just strip everybody (else) naked and send them back into the trees? (Always exempting ourselves, of course. . . .)

That latter is not as ridiculous as it sounds — that someone would make such a suggestion, that is. It is, essentially, the proposal of Arthur Penty, the founder of "guild socialism" who called for the elimination of all (big) machinery, taken to its reductio ad absurdum. It comes as no surprise that G. K. Chesterton and Hilaire Belloc booted Penty from the distributist movement for such rampant illogic . . . or that today's "neo-distributists" (who seem particularly fond of Keynesian assumptions, if not Keynes) — at least those represented on one major distributist website — have more books by Penty alone on their suggested reading list (supplemented with other socialists and Marxists) than by Chesterton and Belloc combined.

The point here, however, is that the purpose of production is consumption. Under the delusion that cutting consumption is essential to finance new capital, however, Keynesian monetary and fiscal policies have stripped purchasing power from ordinary non-capital owners — increasingly without jobs — and transferred it via inflation to the rich.

This allows the rich to invest in new capital that eliminates even more human labor ("jobs") from the production process. It accelerates the eventual implosion that will occur as the powers-that-be try to impose the irrational situation in which a single monolithic entity produces everything that no one has the capacity to consume.

In the interim, and to take up the slack caused by job loss and inflation, consumers and government go into debt. This will, hopefully, be repaid with cheaper money as the government spends more and more and induces inflation at a faster and faster rate to try, like the Red Queen in Through the Looking Glass, and stay where it is.

Clearly this is insane — but that doesn't stop anyone from complaining about conspicuous consumption by the rich, when the real damage is being done by their non-consumption.